Tuesday, June 7, 2011

A Blight at the Heart of the American Political System

The lunatics have taken over the asylum. From Sarah Palin re-writing history with "her version" of the ride of Paul Revere (and her partisans changing Wikipedia to reflect the "new truth" as spoken by Palin), to this case of a Nobel prize-winning economist, Peter Diamond rejected from serving in the Federal Reserve by fanatical ideologues in Congress:

Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?

The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.

In April 2010, President Obama nominated me to be one of the seven governors of the Fed. He renominated me in September, and again in January, after Senate Republicans blocked a floor vote on my confirmation. When the Senate Banking Committee took up my nomination in July and again in November, three Republican senators voted for me each time. But the third time around, the Republicans on the committee voted in lockstep against my appointment, making it extremely unlikely that the opposition to a full Senate vote can be overcome. It is time for me to withdraw, as I plan to inform the White House.

The leading opponent to my appointment, Richard C. Shelby of Alabama, the ranking Republican on the committee, has questioned the relevance of my expertise. “Does Dr. Diamond have any experience in conducting monetary policy? No,” he said in March. “His academic work has been on pensions and labor market theory.”

But understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.

In my Nobel acceptance speech in December, I discussed in detail the patterns of hiring in the American economy, and concluded that structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy — a policy of keeping short-term interest rates exceptionally low and buying Treasury securities to keep long-term rates down. Analysis of the labor market is in fact central to monetary policy.

With politics played like that, a country is headed downhill fast. You end up like the pre-Civil War Congress with factions at loggerheads and deep "grievances" that festered until it broke out in war. That's the path the US is on so long as the broad American public keeps supporting fanatical right wing ideologues (who sell themselves on "family values" but govern to enrich the elites with tax cut after tax cut for the wealthiest).

Personally I question whether "Senator" Shelby has the intelligence, character, or moral integrity to serve in the Congress. I think he is barely qualified to be a dog catcher in the smallest town in Alabama.